$ORCL FQ2 Earnings Preview

by Dan December 18, 2012 11:14 am • Commentary

Event: ORCL reports their fiscal Q2 earnings tonight after the close.  The options market is implying about a 3.9%* move following the print, which is a tad below the trailing 4 qtr average move of about 4.4% and in-line with the trailing 8 quarter average of about 4%.

*With the stock at ~$32.50, the Dec 32.50 straddle is offered ~1.25, if you bought that u would need the stock to be above 33.75 or below 31.25 to make money, or about a 3.9% move.  

Sentiment:  Wall Street analysts are generally Bullish  on the stock with 29 Buys, 14 Holds and zero Sells, with an average 12 month price target of about $36.  Short interest sits at less than 1% of the float.

Fundamentals / Valuation:  Investors focus for the quarter and guidance will be software license revenues as usual, which the company guided to up 5 – 15% yoy, with the street consensus basically right in the middle.  The company faces a generally easy compare due to last years poor performance in fQ2, but the obvious macro-economic headwinds could once again serve as the spoiler, especially when you consider the recent Q3 results from large enterprise focused technology companies such as  IBM, DELL & HPQ.  Investors will also keep a close eye on the under-performing hardware division headed by former HPQ CEO Mark Hurd, and any continued traction on their cloud subscription offering.

ORCL trades at a slight premium to some of it’s large cap tech peers at about 12x fiscal 2013 earnings, but an obvious discount to some of the faster growing cloud-centric competitors such as CRM & RHT.  The stock has benefited this year from a bounce back of some poor execution in the latter half of 2012, but also from investors appetites for companies with rock solid balance sheets and strong cash generation.

Price Action / Technicals:  ORCL has been one of the best performing large cap tech stocks ytd, up 27%, and remarkably only had one day all year that it closed down on the year (May 18th, 2012).

[caption id="attachment_20774" align="aligncenter" width="490" caption="ORCL 1 Yr chart from Bloomberg"][/caption]


From a technical perspective the chart has been a monster in 2012, after a year of under-performance in 2011, relative to the market and many of its large cap tech peers.  As the stock approaches near-term break-out levels to the upside, ~$34 should serve as healthy resistance (Q4 2011 high), while $36 would be the target for a run-away break-out.  On the downside, $30 (the approximate level of the 200 day moving average, which was also the approximate low during the November sell off.

From a longer term perspective, off of the 2009 lows, the stock has held the long term uptrend, but has appeared to stall out and is not close to completing an ascending wedge formation.  That doesn’t mean a whole heck of a lot other than it is like to be resolved in the weeks or months to come as the price action is getting increasingly condensed and we could see the establishment of a new range above $35 or below $30.

[caption id="attachment_20775" align="aligncenter" width="490" caption="ORCL 5 yr chart from Bloomberg"][/caption]


Vol Snapshot: ORCL vol has crept up into the event, even while the actual volatility of the stock has fallen. The december atm options are close to 50 vol, while Jan is about 26. Implied vol tends to fall to the low 20’s following earnings, so expect Jan to come in 20%:

[caption id="attachment_20765" align="aligncenter" width="670" caption="IV30 vs HV30 courtesy of LiveVol Pro"][/caption]


Expectations:  Here is a table of Q2 consensus expectations, along with expectations for Q3 and 2013:

eps sales eps guidance sales guidance
q2 0.61 $9.03b .59- .63 $8.81b – $9.16b
q3 0.66 $9.46
2013 2.66 $11.55b


MY VIEW:  With the stock a couple % from the 52 week highs, I would say that a strong Q2 is in the stock, and that Q3 and 2013 guidance will be the key to the rally staying intact. A Beat and Raise should see new highs, while inline qtr and guidance would likely be viewed with rose colored glasses as was the case with ADBE’s guidance last week.  Investors may be pricing in a bit of a discount to guidance as they feel managements are being slightly cautious given the uncertainty on the “fiscal cliff’.

I do not have a strong directional view, but depending upon your own view, selling the weeklies at the implied move and buying cheaper longer dated options is the obvious play.  We will be sure to post any trades that interest us into earnings prior to the close.